Intersuisse update just out:Toll Holdings Limited TOL Thursday...

Intersuisse update just out:

Toll Holdings Limited TOL Thursday 28 August 2008

Core business in excellent shape: expect margin & revenue growth and acquisitions

Recommendation: Buy to $7.75 for long term growth and a re-rating for Asia

Investment Rationale
TOL is an integrated supplier of transport and logistics services in Australia
and NZ and increasingly across the Asian region following several acquisitions.
It has owned 62.8% of airline Virgin Blue (VBA). TOL has successfully grown
via multiple acquisitions. Exceptionally strong cashflow reduces the need for
equity or debt. In June 2007 TOL demerged the Patrick port assets and rail
company Pacific National to form the separate Asciano (AIO), which assumed
the majority of group debt. Despite a leading position in the Australian market,
TOL still expects to grow revenues organically at twice GDP. This reflects the
low level of logistics outsourcing by Australian companies. Historically TOL has
traded on a high P/E multiple and low yield reflecting its growth potential.
Event
 The figures relate to TOL’s continuing businesses, after the distribution of
Virgin Blue shares to TOL shareholders and the sale of NZ rail and ferry
operations back to the NZ government, with payment received on 2 July.
Divestments netted a write-down of $952m, substantially non-cash items.
 Revenue grew 15% to $5.6bn, driving an 18% rise in EBIT to $429m and
a 24% increase in normalized NPAT from $208m to $258m.
 On this basis EPS grew 20.3% from an adjusted 35.5¢ to 42.7¢.
 Gross cash flow was $496m from continuing operations, strong compared
with EBITDA of $570m. Net debt to equity after settlement of the NZ rail
and ferry sale was 31% with interest covered over 12 times.
 Organic revenue growth was a sound 7.5% in Australia and an improving
12.5% in the immature Asian operations.
 The first six weeks results of FY09 are tracking well ahead of last year.
Impact
 In Australia, H2 continued to produce excellent organic growth, reflecting
new contracts and growing market share. Revenue grew 8.6% to $4.4bn.
Adjusting for acquisitions and fuel surcharges, revenue grew 7.5%, by
$304m. EBIT margin expanded from 7.21% to 7.84% for the year, and
continued to widen in H2, testimony to management’s focus on
efficiencies, investment and technology and customer orientation.
 Toll Asia revenues grew 38% to S$777m with underlying organic revenue
growth of 12.5%. EBIT strengthened 12% to S$82m. Revenue and EBIT
growth accelerated in the second half. Management was encouraged by a
high rate of contract retention, a number of major new contracts and
increasing levels of business with existing clients.
 The new Toll Global Forwarding division generated $358m of revenue and
$11m of EBIT from 1 March 2008, with MD Paul Little very optimistic
about prospects. TOL has low debt and expects opportunities to acquire
through FY09 as the industry rationalises under cost and debt pressures.
 Discretionary spending drives a fairly small proportion of revenue and
TOL has seen as yet little sign of a slowing economy. Resource and
defence sectors are strong in its diverse client base. TOL’s ability to lower
supply chain costs for customers is a particular plus in challenging times.
 TOL is frustrated by the results of its 38% owned Japanese associate
Footwork Express in a soft Japanese economy. It is reviewing its options
as, with control, it sees upside given Footwork’s extensive network.
Recommendation Impact
An excellent result for the continuing activities has added to our confidence in
the strength of TOL’s core business and its Asian upside. Despite a recovery
on news of the VBA ‘demerger’ by dividend, the accelerating Asian story is not
yet in the price and TOL is priced below peers, creating a buying opportunity.